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Study: U.S. defense industry must adjust strategy for coming decade

By Victoria Fryer

May 21, 2014

Study: U.S. defense industry must adjust strategy for coming decade

UNIVERSITY PARK, Pa. -- Looming changes to the U.S. defense landscape may call for adjustments in product development, operations and global strategy, according to Terrence Guay, clinical professor of international business at the Penn State Smeal College of Business.

In a recent analysis for The CIP (Center for Infrastructure Protection) Report, Guay outlined three primary factors precipitating that shift: imminent U.S. defense budget cuts, a U.S. military transition from traditional weaponry to technological dominance and continued changes in the global arms market.

U.S. Defense budget cuts

Considering the withdrawals from Iraq and Afghanistan and the growing buzz at home around balancing the budget, the U.S. defense budget stands to face significant cuts.

To mitigate possible losses in U.S. government business due to budget cuts, Guay recommended that the defense-sector industry diversify into nondefense business.

“Indeed, that is the strategy pursued by some of the largest companies,” he wrote. “In 2005, Boeing derived 56 percent of its revenue from defense. By 2012, it had dropped to 38 percent.”

Transition toward technology over weaponry

A trend beginning with the Sept. 11 terrorist attacks on the U.S. toward the “high-technology dimensions of security -- particularly areas like intelligence, surveillance and reconnaissance” will continue into the coming decade.

As a result, declining Pentagon budgets will most likely be focused in areas of high technology versus traditional weaponry.

“Thus, the proposed 2015 defense budget aims to eliminate programs like the A-10 aircraft but spend more on the Global Hawk reconnaissance drone and cyber security,” Guay wrote.

Global arms market

The likely decrease in U.S. military business will make defense industry exports even more important, but the global arms environment is undergoing some changes of its own. European countries have already vastly reduced arms expenditures in an attempt to mitigate the region’s recent economic woes.

“Since U.S. defense spending comprises about 40 percent of the global total, cuts in the U.S. will have a disproportionate effect on international arms sales,” Guay wrote. “This means competition for arms sales in markets outside the NATO region will intensify.” However, he continued, “Technological sophistication and foreign policy considerations will continue to favor the U.S. industry.”

Guay’s analysis, “The Defense Industrial Base in an Age of Uncertainty,” appeared in the April 2014 issue of The CIP Report, a publication of the Center for Infrastructure Protection & Homeland Security at George Mason University. Guay, a Smeal faculty member since 2004, has expertise in the defense industry, globalization and trade, Europe, business-government relations and nongovernmental organizations.